EightBlack.

Last week, the Management of BlueFreeway requested that their shares be suspended from trading because they wanted another day to prepare their half-year financials. They’d already missed the Feb 20 deadline, and said that they would release the numbers on the 28th. Then they missed that date too and wanted another 24 hours.

Something was clearly bothering them. And naturally, the rumour mill was active.

When the results were posted, on the surface, they didn’t look all that bad. Revenues were $35 million but they had posted a loss of $4 million. Not as bad as some might have expected.
But when you drill into the detail towards the end of the report, this is what struck me as alarming.

“27% of Clear Light Digital was acquired for $924,000 in cash and just $10,000 in shares”.

Obviously the founders wanted the security and comfort of the folding stuff rather than scrip. Smart move.

Mark Kulic, the Partner at Deloitte who signed the Independent Auditors Declaration clearly has some doubt with his closing comments:

“Without qualifying our conclusion, we draw attention to Note 1, in the financial report which indicates that the disclosing entity incurred a net loss of $4,048,000 during the half year ending 31 December 2007, and as of that date, the disclosing entities current liabilities exceeded its total current assets by $42,347,000. These conditions, along with other matters set forth in Note 1, indicate the existence of a material uncertainty which may cast significant doubt about the disclosing entity’s ability to continue as a going concern…”

Why can’t the auditor just say “We’re worried like hell that the joints been run into the ground” or that “they’ve clearly screwed up the go to market strategy”. Or “bugger me, $42 million is a big number for anyone to jump over…”

Under the very last section “Subsequent Events” the report goes on to state:

“The company received commitments of $3 million by way of a private share placement” and “the company had received a non binding, indicative proposal for all of the shares of BlueFreeway Limited”.

Two things of importance - and perhaps not best left for the very last section of the report. One they desperately need the cash to survive. And 2, they probably find themselves in an unenviable position in having to deal with what might look like a fairly friendly offer to acquire the whole business but may turn out hostile in the end.

The other thing to note is that they breached their banking covenants. They’re not the only ones of late. But the NAB won’t have a sense of humour with this and while they may have extended the line of credit for the last time and given the BlueFreeway management another $3 million, they won’t want to kiss goodbye the $30 million or so in borrowings.

In accounting terms, they’ll have “the bank up their arse”. Or something like that.

When senior board members like David Smithers (ex PWC) and then the CFO jump ship, you’ve got to worry about what is really going on.

I really feel for the talented folks who sold some, part or all of their company’s to the BlueFreeway machine. Actually, the guys at Clear Light Digital are smart to take most of their payment in cash. As was anyone else who did the same. But the guys who took more like 50/50 in cash and shares and then who invested further in the company stock, must be regretting the day.

I don’t have it in for BlueFreeway. I really don’t, despite some of the negative comments my recent observations have sparked (by the way, if you remain anonymous, I won’t post your comment). Everything else is fair game.

I just think that the way in which they executed was remarkably flawed and if the ulterior motive was a stock market play, then the tactic has clearly misfired.

In the 6-months to December 2007, the group had acquired a controlling interest in a company in France, a company in the UK, one in Chile and 3 in Thailand. How on earth can they actually manage all those successfully and integrate efficiently without a shitload of money and resources?

It’s a very long road back from here. The stock, while recovering somewhat of late, has still a massive road ahead just to get back to its listing level. That’s if the market will allow it.

At the same time, BlueFreeway’s bean counters will be putting a lot of pressure on the entire stable of companies to remit the cash as quickly as they can. It’s such a short term focus when many of the founders will have been looking to the Group to provide stability, backing, funding and management expertise.

I’m afraid it’s all hands on deck and the ship is still taking on water.

My bet is that someone will come in and acquire the lot. For a song. And that is going to be shame.

*Image courtesy Hugh McLeod, Gaping Void. 

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This entry was posted on Sunday, March 2nd, 2008 at 9:35 pm and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.